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An oil producer is afraid of a price decline. In August, he anticipates he will sell his August production in September. His production is 1,000

An oil producer is afraid of a price decline. In August, he anticipates he will sell his August production in September. His production is 1,000 barrels a day for 25 days. The cash price in August is $20 per barrel, and October futures are quoted in August at $20.10 per barrel.

To hedge his position, he sells 25 October futures (each contract is for 1,000 barrels, so this represents his August production of 25,000 barrels) at $20.10, which locks in a value of his inventory equivalent to $502,500 ($20.10 per barrel times 25,000 barrels.) Along comes September 15, and the price of crude falls in the cash market by $2 per barrel.He sells his product in the cash market to the refinery for the current price of $18.He buys back his futures contract for the new price of $18.

  1. How much revenue did he generate from selling the actual oil?
  2. How much net revenue did he generate from his two futures trades?
  3. So, what was his total revenue?

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